Today's Comments

Last Friday's move higher in gold continued overnight when Asian trade resumed and is continuing in today's trading session. On moderate volume last Friday, open interest rose but rather insignificantly considering the extent of the volume, indicating strong short covering was behind the move higher on Friday. That confirms the move lower in reported holdings from GLD.  Also, spreaders seemed to be active as well. Ukraine events are making it tough on hedge fund computers which are being whipsawed as fears rise and fall.

A couple of things are worth noting in today's session. First, there were safe haven flows into gold and back into the yen today, but the yen's gains were rather mediocre and bonds actually dropped today with a corresponding slight uptick in interest rates on the long end. Stocks also moved off of their worst levels. I am watching this closely to see whether or not the market has "baked into the cake" the current events in Ukraine. Events over there are driving gold at the moment meaning that the situation will need to continue to worsen in order to keep driving the price of gold higher and higher. That is entirely possible as the market waits for a presidential election later this month.

That is the nature of a market responding to geopolitical events. It is also the same nature as the grain markets reacting to a weather forecast. Price will move higher accounting for the events/ forecast and then stabilize while traders take a "wait and see" attitude and attempt to anticipate whether things will go from better to worse or vice versa.

Copper was once again tripped up by weak Chinese factory activity data. HSBC China Manufacturing Purchasing Managers' Index came in at 48.1 in April. That was essentially unchanged from March which registered a 48. To understand what this means, a reading under the 50 level indicates contraction. Copper prices seem to have found a bottom but lack an upside catalyst at the moment. It is going to continue to track Chinese data very closely. Some of this weakness in copper is impacting silver which continues to struggle and cannot yet get firmly above the $20 level.

The Dow initially reacted to poor earning news from Pfizer and JP Morgan Chase. Investors seem to have one eye on Ukraine, as fears that the conflicts there could widen out are keeping them nervous, with the other eye on earnings reports. Price rebounded around mid-session however as some bargain buying showed up. Some money managers are using equity weakness related to Ukraine fears as opportunities to buy on a pullback.

Currency traders are not expecting much in the way of action from the ECB although they are nervously eyeing the lack of inflation in the Euro Zone to see if the ECB is going to eventually move to their own version of QE. The consensus at this point is that nothing is going to happen on that front until next month. No one is expecting a rate move in May. We'll see soon enough.

Something that has been fascinating for me to watch has been the reaction of the bond market to the Fed tapering plans. The thinking was that once the Fed began to back out of the $85 billion per month bond buying program ( split almost evenly between MBS and Treasury purchases) that long term yields would spike higher. The reason for that line of thinking was that "no one was going to be left to buy US Treasuries".

Well, that has not turned out to be the case at all. Either the current Fed has become the greatest bond traders to ever exist or they have gotten extremely lucky with their timing. Who would have thought that safe haven buyers would show up to pick up the slack in their Treasury buying? I mean, what could have been more timely than to have a geopolitical event take place during a period of reduced Fed activity in the Treasury markets? Damn, are these guys/gals good or what? 

The flip side to the bond markets this morning has been  the April ISM Service Sector number. It came in at 55.2 against an expected 54.1 reading and against a 53.1 recorded for March. That served to take some of the safe haven bid out of the bond market as traders viewed the improvement as further confirmation of last Friday's surprisingly strong payrolls number.

All I can tell you as a trader is that the interest rate markets are chewing up a lot of guys right now who are getting whipsawed left and right in there as well. It is not just gold - it is a lot of different markets right now that are shredding traders and investors alike. That is why I keep saying that good traders do not always need to be in the market. Sometimes sitting on the sidelines is the best part of wisdom. Besides, there are lots of different markets out there that are well behaved right now and offer better opportunities.


On the grain side of things - Dryness issues are keeping wheat supported at the moment. Soybean inspection numbers released this AM reflect the impact of these sky high old crop bean prices - they are lousy once again. Old crops beans reacted by moving lower. Corn inspections continue to run above expectations and that is putting a strong bid into corn. Farmers are still sitting on large stocks of last year's harvest however and I am not sure what it is going to take to get them to let go of them. When they do, things could get dicey depending the weather for this year's crop.

Coffee continues to act like a yo-yo. The worst nightmare I ever had as a trader was a dream in which I was trapped in a small room with no exit and forced to trade nothing but coffee for a living. I remember waking up in a cold sweat just as I was about to stick my finger in the electrical socket to end my misery. Seriously - who trades this stuff but more importantly, why????

If the Protestant Reformation had not taken place and penitents were required to abuse themselves like the flagellants once did to atone for their own sins, trading coffee futures would have been right up there with that for the top penance.

Here is the short term chart for gold: Gold continues within its range trade. It has managed to recapture the "13" handle and looks as if it might want to try to test the first level of resistance noted near $1320. Above that lies $1330. Support remains intact near $1280.

If events in Ukraine worsen, gold will more than likely take out $1330. That would set up a challenge of tough resistance between $1350 - $1360.

The ADX is turning down after having begun to rise meaning that the potential trending move LOWER has been aborted and we are back to ranging. The short term buy signal from the stochastics indicator can be seen on the chart.


The HUI gapped higher this morning on the opening of US equity trading but so far in the session, that has been the best level. The gap remains open but the index is not adding to gains and is currently below the opening level. That bears close attention. The session is young however.

U S Interest Rates Driving Gold Price ( along with Ukraine )

Sorting out the movements in the price of gold recently has been like guessing at the weather forecast. Geopolitical concerns, ( Ukraine ) are keeping a firm bid underneath gold as safe haven buying is focused on the potential for further escalations in those simmering tensions. Other factors are working to pressure it lower.

Having said this, I do want to post up a chart for those who are traders and are tracking fundamental factors driving the price of the metal.

I have mentioned many times now that I am of the view that US interest rates, and more accurately, interest rate outlooks, are either providing support to the metal or are working to add to headwinds.

Look at the chart below in which a comparison is made to the yield on the Ten Year Treasury Note and to the gold price over at the Comex  ( RED LINE ).

Go back to November of last year and notice that as the yield on the Ten Year rose, gold headed lower. When the yield on the Ten Year fell, gold tended to rise. The relationship had not been that close prior to November. If you look at the July - mid-October time frame, you can see that the two markets tended to actually rise and fall in harmony for a while.

Clearly in November the market shifted in its perceptions and began looking at interest rates more closely in determining whether or not to allocate capital into gold. For nearly three months, the markets moved in a near perfect inverse manner.

In early February of this year, that began to change  and while the yield on the Ten Year moved sideways, gold prices rose. Then in mid-March interest rates began to rise and gold prices resumed their inverse relationship and moved lower once again. In early April, Ukranian events erupted and that brought about a safe haven bid into bonds knocking interest rates lower. Gold responded by moving higher. Then as fears subsided interest rates moved back up again and gold moved lower. So far in May, interest rates have continued moving lower as safe haven plays are still around due to Ukraine and gold has moved back above $1300 as a result.

Here is my point in all this - the wild card for gold prices at this time are the events in Ukraine. As long as investors are worried over events there, interest rates are going to stay low due to safe haven flows pushing bond prices higher and thus interest rates lower.

If Ukraine events do subside ( and right now that does not seem to be the immediate case ) I would look for interest rates to start rising again meaning that gold will come under renewed selling pressure.

Here is the takeaway from all this - as long as US interest rates stay subdued, the US Dollar is going to have trouble rallying and that should tend to support the gold price. Take away any safe haven buying for any reason, and rising interest rates should bring a bid into the US Dollar and that will pressure the metal.

What do we get next? Who knows? The truth is no one does. Remember that when the predictions start up again. The market's opinion is the only one that matters.

Further Drawdowns in GLD

The reported holdings of GLD, the big gold ETF, are updated as of the close of trading this past Friday ( 5-2-2014) and they showed another reduction.

For the week, GLD showed a drop of 10 tons in gold holdings. Friday alone brought a drop of 2.7 tons, which I find rather remarkable considering the fact that gold over at the Comex shot up sharply when news hit the wires about the first of two helicopters being shot down over in Ukraine.

I have mentioned previously, that many in the West are looking at rallies in gold as selling opportunities. This seems to be the case with GLD. One might have thoughts that with the safe haven plays that we witnessed across the futures market on Friday ( Yen higher, gold higher, and bonds higher ) , that GLD would register an increase in gold holdings. That was not the case.

Western sentiment towards gold remains dubious therefore. Since the beginning of the year, GLD has dropped 16 tons of gold. Total holdings are now reported at 782.85 tons, a 64 month low!

I put a lot of credence in this big ETF as a gauge of Western-oriented investment gold demand. When gold was in a strong bullish uptrend, reported holdings rose along with the trend. When gold entered its current bear market, reported holdings began to drop alongside the move lower in price. Demand from Western-based investors has thus ebbed and flowed along with price which is as it should be.

When we see these sorts of divergences, with the Comex gold price going one way and the reported holdings of GLD going the other, it indicates that the move higher in price was being primarily driven by short covering over in the futures market. Short covering rallies are often quite spectacular and can be very compelling because they can drastically change the chart picture in a short time, but one needs to exercise caution because they can flame out just as rapidly as they flamed on, especially when the move is due to a geopolitical event. Such things are notorious for generating many wild swings in price.

Traders therefore need to be cautious and remain flexible. If GLD holdings begin to rise alongside of a rising gold price, that will be a friendly development. For the time being however, that is not what is happening.

Let's see how events over in Ukraine fare the rest of the weekend and what the opening of trade in Asia on Sunday evening here in the West brings our way.

CME Fines Ontario Teachers' Pension Board over Hog Futures Trading

That is the headline that came down a Dow Jones wire story this afternoon. It seems that the good teachers pension board had too many piggies in its portfolio. In other words, they exceeded exchange position limits.

CME fined the Board $15,000 and ordered them to return the nearly $18,000 profit they made in lean hogs back in March 2013 according to the story.

Hey, I wonder if some of that $18,000 happens to be my money?

How do I get a refund?

Seriously however, I do wonder what these exchanges do with that money that they collect, not as a fine, but rather as profits. The teachers' board had to take it out of someone else's pockets to earn it as this is a zero sum game.

I think I will fill out an application and see if that works! Then again, the report does not say whether they made those profits from being on the short side or on the long side. I will have to go back and see where I was positioned back then. I know I was in that market at the time. What would be a bummer would be if I happened to be on the same side as they were. Then what? do all of us traders who are positioned likewise have to hand over our earnings to the CME?

Obviously I am kidding here but it does go to show that these position limits are a big deal. I am of the view that if the exchanges really want to tame some of these broken markets, that instead of fooling around with raising price limits, they should instead deal with position limits and REDUCE them, not increase them like they have been more prone to doing.

What is Copper Up To?

There is an interesting development in copper this week which I feel deserves noting. It pertains to the Commitment of Traders report and the positioning of the hedge fund category.

This category of traders has been net short for some time now. As a matter of fact, the only category of traders that has held the net long interest in the copper market has been the Swap Dealer category. Every other group, the Commercials, the Hedge Funds, the Other Large Reportables and the General Public or Small Spec trader have all been net short.

That changed this past week for the hedge funds. They are, as of Tuesday, now net long in copper. The movement has been consisting primarily of short covering but now new longs are joining in.

Here is a chart of the COT for copper.

Note how the hedge fund positioning at the beginning of this year started out as big net longs only to see them move to the short side of the market in February. They were briefly long again for a week in late February only to quickly establish a larger short position.

I can tell you that a great deal of this weakness was related to both lackluster home sales here in the US but more importantly, continued weakness in Chinese data. Last month they began covering shorts and they have now, about a month later, moved to a net long exposure once more.

So, we now have the swap dealer and hedge funds on the net long side with the commercials, other large reportables and small specs on the net short side.

Here is the price chart:

You can see that the recovery in copper prices pretty much coincides with the shift by the hedge funds in favor of the long side. Once copper climbed back above $3.00 and held there, funds began covering as the downside appear limited at those levels. That has brought the market up towards $3.12 but weak economic data had limited bullish enthusiasm for the metal. Today was different in the sense that the copper market seemed to read the stronger payroll number as a sign that the US economy was strong enough to keep the price supported above $3.00, in spite of doubts about the vigor of the Chinese economy.

Why do I bring this up? Simple - in my view silver prices are tied to copper prices more so than to gold right now. Hedge funds have been gradually moving to play silver from the short side although they remain as net longs, not by a significant amount however. Thus far, the $19 level has been holding as support for silver. It penetrated that level this week but rebounded today when gold took off on the Ukrainian tensions.

If hedge funds continue to move further towards the net long side of copper, there is a good chance that silver will follow suit. Remember silver needs an improving economy to move higher. During any sort of slow down fears, it is not going to move higher. Those who keep trash talking the US economy and in particular the US equity markets, who yet at the same time expect silver to rally, are at complete odds with themselves, even if they do not realize it.

Silver more so than gold, needs inflation to move strongly higher. It certainly needs something to make it convincingly past the $20 level. Thus far attempts at getting past there have not met with much success.

I am the first to admit that when it comes to silver, its combination of being both an industrial metal and a precious metal to some, make deciphering what it is responding to tricky at times. However, a rising copper price is not going to hurt silver, that is for sure. Let's see if copper can climb past the $3.20 level. If it can do that I would think silver can hold above $20. At this point, the jury is still out however.

If copper succumbs to any further evidence of a slowing China, then it is going to act as an anchor on the silver price.

Each piece of economic data that comes out of both the US and China in the weeks ahead will take on great significance in ascertaining whether or not these metals have a shot at starting an uptrend of any durability. More importantly than the actual data however will be the market reaction to that data.